[183 NJSuper Page 327] The novel issue raised in this case is whether a "due on transfer" clause in a mortgage instrument is triggered by the transfer of the mortgaged property by operation of law, or, more specifically, by its devolution by devise or descent.*fn1 The
issue is presented in the context of plaintiff's claim for exoneration of the mortgage on real property in which she has inherited an interest.
In 1975 Charles F. Egner, Jr. borrowed $200,000, secured by a ten-year mortgage on a parcel of commercial real estate. The mortgage instrument contained a standard "due on transfer" clause, providing for acceleration of the entire debt at the option of the mortgagee should the property be transferred or conveyed by the mortgagor without the mortgagee's consent.
In 1978 Mr. Egner died testate, devising the encumbered property in equal one-third shares to plaintiff, his widow, and to defendants, his two children, as tenants in common. The will also named the defendants executors and directed them to pay as soon as conveniently possible "any debts due at my death."
In support of her claim for exoneration of the mortgage, plaintiff makes an original argument: Under the will, title to the property was transferred automatically upon her husband's death. Such a transfer triggers the acceleration clause of the mortgage, thereby transforming what had been a term loan into a demand obligation. The entire amount of the mortgage debt therefore came due at testator's death and under the terms of the will must be promptly paid by the executors out of the residue of the estate. Defendants, as executors and residuary beneficiaries, have moved to dismiss or, in the alternative, for partial summary judgment as to that portion of the complaint which seeks exoneration of the mortgage.
It is settled law that title to real property vests in the heir or devisee automatically and immediately upon the death of the owner. See N.J.S.A. 3A:2A-2; In re Widenmeyer Estate , 70 N.J. 458 (1976); Montclair Nat'l Bank & Trust Co. v. Seton Hall College of Medicine & Dentistry , 96 N.J. Super. 428 (App.Div.1967); Ratti v. Ratti , 6 N.J. Super. 352 (App.Div.1950); McTamney v. McTamney , 138 N.J. Eq. 28 (Ch.1946). Thus a change of ownership of the property in question occurred by operation of law at the instant of Charles F. Egner's death.
Does such an automatic conveyance of title trigger the "due on transfer" clause of the mortgage, thereby allowing the mortgagee to elect to accelerate the full amount of the debt? This court holds that it does not.*fn2
At first glance, it would appear that N.J.S.A. 3A:26-1 disposes of the matter. The statute provides:
When property subject to a mortgage or security interest descends to an heir or passes to a devisee, such heir or devisee shall not be entitled to have such mortgage or security interest discharged out of any other property of the ancestor or testator, but such property so descending or passing to him shall be primarily liable for the mortgage or secured debt, unless the will of the testator shall expressly or impliedly direct that the mortgage or security interest be otherwise paid. [Emphasis supplied]
Plaintiff, however, argues that the exception set out in the final clause of the statute applies here, since the terms of the will expressly direct the executors to pay any debts due at the testator's death.*fn3 ...